Wednesday, April 25, 2012

The Puzzling Persistence of Resistance to Keynes

By Mike Dorf

Here's a puzzle: Why aren't Paul Krugman's Keynesian views more popular? Krugman has been more or less running around with his hair on fire ever since the start of the Great Recession arguing that the U.S. needed a much larger stimulus than it got and explaining why, per Keynesian theory, austerity measures in Europe would not lead, and have not led, to growth.

It's not hard to see why American Tea Partiers resist Keynesianism. The American right has long sought to reduce the size of American government--or at least to reduce taxes--and they regard Keynesian stimulus as simply a means by which the left justifies expansion of government programs that the right wants to eliminate. That's the political explanation, anyway, but it usually travels with a number of economic claims.

One such claim is nicely ridiculed by Krugman's repeated discussions of the "Confidence Fairy," a being he treats as about as real as the Tooth Fairy. Believers in the Confidence Fairy, Krugman says, expect that austerity will lead to economic growth because responsible government behavior will give private investors confidence that they can make secure investments, rather than worrying that borrowing today will lead to taxes tomorrow.

Another anti-Keynesian view worries about borrowing costs. Here the concern is that when the government spends borrowed money, it raises the cost of borrowing for private investors. That would be true in an economy at or near full capacity, but it's generally false when the economy is in recession--as the persistence of low interest rates in the U.S. attests.

Hayekianism provides the most sophisticated source of anti-Keynesian thinking. Hayekians say that stimulus at most promotes an artificial boom, which then leads to a bigger bust, and so in the end the economy is less distorted--and the boom/bust swings are less severe--when the government does not attempt to manipulate matters through fiscal policy. The case for and the case against Hayekianism are more complicated, so I won't go into them, and in any event, I'm not really interested in drawing economic conclusions here; I'm more interested in giving a causal explanation for the views that people appear to hold. I am sure that there are plenty of economists who choose between Keynes and Hayek based on their assessment of the theory and evidence, but when people without serious knowledge of economics proclaim themselves to be followers of Keynes or Hayek, they are likely just picking a macroeconomist based on their ideological commitments.

But that brings us back to the puzzle. It's easy to see why anti-government American Tea Partiers would sign on with Hayek. And given how far to the right American politics is relative to the rest of the democratic world on questions of the proper scope of government, it's not surprising that the skepticism of Keynesianism would extend pretty far into the middle of U.S. public opinion. But that leaves the question of why Europeans seem to be at least as anti-Keynes as the American right. After all, Europeans have had over half a century to get used to much more generous welfare states than the U.S. ever had, so it's very surprising that they have not been embracing a set of economic ideas that should greatly soften their landing. As this NY Times story notes, the European skepticism of Keynesian stimulus is beginning to soften, but for much longer than one would have expected, Europeans have maintained a commitment to austerity as the path out of their troubles. The question is why.

One possibility is the dominance of Germany and Germans over the rest of the Europe on economic matters. The Germans themselves live in perpetual fear of the return of Weimar-style hyper-inflation, and so they recommend austerity policies even when the greater risk is deflation. One might think that the preference for austerity in Europe is really just a German preference that is dominant because of Germany's dominant economic position. To this story of German dominance, one might add that even technocratic political leaders from southern Europe like Mario Monti and Lucas Papademos have worked for so long in the European organs that Germans and other northern Europeans dominate that they merely extend Germany's influence to Italy and Greece, respectively.

I don't want to deny the foregoing explanation, but I think it is still incomplete. In my admittedly unscientific impression of European public opinion, I have found that (at least until very recently) even the sorts of people who would likely be Keynesians in the U.S. (i.e., liberal academics), have tended to regard Keynesianism skeptically.

And that brings me to my final hypothesis: I think that much opposition to Keynesianism, both here and abroad, comes from a kind of moralism that regards it as a cheat. Just as individuals who borrow and spend profligately have an obligation to work off their debt (rather than to get bailed out), the anti-Keynesian moralist thinks, so too governments that borrow and spend their way into an economic crisis have an obligation to tighten their belts to climb back out of the hole. In this view, the Keynesian idea that the best course after the economy has crashed because of high debt load is to borrow and spend some more seems not just perverse but positively immoral. Accordingly, we have an explanation for why Tea Partiers and many others commonly conflate bailouts of private firms with government stimulus spending.

More generally, the hostility we see to Keynesianism probably has less to do with people being persuaded by Hayek than it has to do with their viewing the world in the way that Weber said that northern European Protestants viewed the world in his Protestant Work Ethic and the Spirit of Capitalism. My recollection from having read Weber (long ago) was that there was debate about the degree to which he correctly identified Protestantism as the driving force behind capitalism. But the spirit of capitalism itself is widely diffused among Europeans. Indeed, without it, the relatively generous social welfare states could never have taken root, because a society filled with shirkers who prefer the dole could not afford the dole.

Indeed, I think that the "spirit of capitalism" to which Weber referred may even be ascribed to Western culture more broadly. Think about Lenin, paraphrasing the New Testament in his statement "who does not work, he shall not eat." Insofar as Keynesian stimulus promises a free lunch, it contradicts a deep moralistic strand of Western thinking. That doesn't justify opposition to Keynesianism, but it may explain what is otherwise a puzzling resistance.

9 comments:

I think you are truly on to something. Direct proof, of course, is the term "moral hazard" that is bandied about not just by conservative economic policy discourse, but on the US left (which is the rest of the world's center-right). The concept of moral hazard explicitly states the moral case against bailouts, handouts, or anything else that might alleviate the individual or institution from what is seen, from Olympian heights, as bad decision-making.

A good friend of mine -- he's English, but he spent many years in the US and is a great fan of this country -- was the person who first twigged me to the fact that so much of the economic discourse in the US is cast in moral terms. It happened during a discussion we were having about unemployment insurance and benefits. "But you see," he said, "in the US, it is considered a sin to be unemployed." He was on to something...

I've thought about the Europe issue a lot & talked to a number of EU law folks. I'm skeptical that current Germans are really that freaked out about inflation that their great-grandparents experienced.

What I hear instead from "northern" euro countries is a deep distrust of "southern" euro countries, whom they suspect will manage their own economies & fiscal houses carelessly and then expect the ECB to inflate away their troubles. "Northern" euro folks see themselves as likely creditors and so the ones who will effectively pay for the inflation bailout.

of course, knowing what we know about Italy & Greece one has to admit there's something to this moral hazard story. But it's surely greatly overstated, especially given that threats of future punishment are relatively unlikely to really deter fiscal mismanagement by current "southern" euro governments.

The key to understanding this moralistic attitude in economics is that people adopt civic morals that reinforce the moral habits of everyday life. In a depression, these moral habits must emphasize frugality. Keynesian policies, unfortunately, are out of synch with mass psychology.

I set out a theory of civic morality in a recent posting "A habit theory of civic morality" at http://tinyurl.com/7t3zrrl (or get the entire morality series at http://tinyurl.com/7advgq5)

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